Wednesday, 17 June 2009

The price of everything and the value of nothing: final report on BERL's cost study

Update 18 June: For folks coming in from elsewhere, do note that I'm slowly blogging my way through our whole critique of the BERL report. Follow the BERL tag for all the latest. Original post follows below.

There's an old joke about economists.

A business executive interviewed three candidates for the position of quantitative consultant to his company. One was a mathematician, one a sociologist, and one an economist. He invited them one by one into his office, saying he wanted some insight into how they’d perform on the job and had a question for them: "What’s two plus two?" The mathematician answered, "Why, four, of course." The sociologist responded, "Well, it all depends. We have to look at the context of the question, its antecedents, the general view in the population as a whole of this sort of question, and many other things." The economist moved close to the executive and in a furtive voice said, "What do you want it to be?"

With that in mind:

MEDIA RELEASE17 June 2009

FOR IMMEDIATE RELEASE

Reported costs of alcohol abuse "grossly exaggerated" according to economists

A widely publicised $135,000 government report on the cost of drug and alcohol abuse has been slammed by two economists, who say the report’s findings are grossly exaggerated.

Economists Eric Crampton and Matt Burgess have released a research paper which examines the report, by Wellington economics consultant Business and Economic Research Limited (BERL), after Law Commission President Sir Geoffrey Palmer cited its findings in support of proposed new regulations on alcohol.

“What we found shocked us. BERL exaggerated costs by 30 times using a bizarre methodology that you won’t find in any economics textbook,” Dr Crampton said.The BERL report was commissioned in 2008 by the Ministry of Health and ACC, and put the annual social costs of alcohol at $4.79 billion. Crampton and Burgess said the net social costs instead amounted to $146 million – 30 times lower than that calculated in the report.

“BERL has virtually assumed its answer. The majority of the reported social costs rest on two very strange assumptions which BERL has asserted without any reason or evidence,” said Dr Crampton said.

“The report assumes that one in six New Zealand adults drinks because they are irrational; that is, they are incapable of deciding what is good for themselves. BERL further assumes that these individuals receive absolutely no enjoyment, social or economic benefit from any of their drinking,” Dr Crampton said.

“These assumptions allowed BERL to count as a cost to society everything from the cost of alcohol production to the effect of alcohol on unpaid housework. That’s bad economics.”

Among other serious flaws, Dr Crampton said the report’s external peer review was done by the authors of the report’s own methodology, important findings in academic literature that alcohol had health and economic benefits were ignored, BERL did not properly warn readers about the limitations of its methodology, and used language in the report that was frequently misleading.

The BERL study caught the economists’ attention when it was cited by the Law Commission as the basis for supporting proposed new taxes and regulations on alcohol.“We’re doing this because we don’t want to see legislative decisions being misguided by bad research. In our view, the Law Commission should give no weight at all to the findings in the BERL report,” Dr Crampton said.

Dr Crampton stressed their review wasn’t an attack on the “very real” issues of alcohol and drug abuse. “These are deep problems, but rather than being taken seriously they have instead been trivialised by numbers that beg the question,” Dr Crampton said./ENDS

The review of BERL’s report is available for download here; supporting calculations available here. The BERL report is available here.

Eric Crampton is Senior Lecturer in Economics at the University of Canterbury. Matt Burgess is a Research Associate at the Institute for the Study of Competition and Regulation. The views expressed solely reflect those of the authors, and do not necessarily represent those of the institutions with which they are affiliated or their constituent members.

What other work have these clowns produced that has been used as the basis for government policies? Hopefully their future output will be subject to microscopic scrutiny.I can only hope they are embarrassed into refunding their fee to the Ministry of Health and the ACC (i.e. the taxpayer)......

Damming. It'll be interesting to see how Berl respond -- they really have to.

I agree that the main basis for there to be any net benefit/cost is for there to be externalities: assuming everything is a cost, and ignoring benefits misses the point.

Here's an off the wall thought: if alcohol consumption causes a death, and that death is bad and has a "cost", then what about the vast army of NZers conceived whilst their parents were intoxicated? Alternatively their birth would be delayed; is that the source of an enormous benefit? Perhaps -$4m for every birth that wouldn't have happened, and an annuity equivalent for each year birth was brought forward?

Funny. We also have to worry about the costs of all those folks who drink zero alcohol and thereby impose costs on the health system: moderate consumption has health benefits, so surely it should be mandatory :>